Price of oil doesn't change its impact on planet

12 2月 2015

Nathan Goode on the outlook for renewables in 2015

I don't need to tell anyone reading this article that the price of oil has dropped by around 60% over the past six months. The media is awash with predictions of the likely impact from deflationary spirals and economic collapse to a consumer spending boom and global revival. The truth is, we just don't know. We don't even know how long the oil price will stay down. After all, OPEC could decide to tighten the taps at any moment.

But that's not to say we cannot attempt to pick through the noise and ask what this all means for renewables. Below are five trends to look out for in 2015.

1. Cleantech businesses are understandably cautious

It is too early to see exactly what effect the oil price drop will have on the viability of clean investment projects, but businesses in the sector are understandably cautious. According to the International Business Report, our quarterly business confidence tracker, the proportion of cleantech companies expecting to increase revenues and profits in 2015, slipped from 62% to 44%, and from 54% to 28% respectively, over the past three months.

The lack of optimism in the sector is clearly a big concern as momentum builds towards the (potentially momentous) UN Climate Change Conference (COP21) in Paris at the end of the year. However, there is a lot more to cleantech than fossil fuel alternatives, and in any event as global markets slowly adjust to the 'new normal' price of oil, I expect cleantech growth to pick up again. Cheaper oil is unlikely to be used as a substitute for clean electricity generation, especially as ongoing improvements in battery storage capacity are making renewables even more competitive.

2. Now is the time to invest in a clean energy future

The greater energy security renewables offer is also being felt from Europe, whose (over)reliance on gas supplies from Russia has been brought into sharper focus by the Ukraine crisis, to Africa, where microgenerators offer business and households an opportunity to decouple from inefficient transmission systems. The oil price drop offers governments, businesses and even consumers the financial space to invest in renewables and in doing so to protect themselves against future price hikes. The recent decision by governments in India and Indonesia to remove wasteful fuel subsidies (which tend to benefit the rich as car owners as opposed to the poor) and invest the savings in improving infrastructure is a great example of how to use a (potentially) short-term bonus to long-term effect.

The oil price drop offers a window of opportunity to ease the admittedly thorny process of slowing global warming. And importantly, 2014 was the year when the myth that a reduction in carbon emissions presupposes a slowdown in economic growth was finally debunked. This view, championed by entrenched interests such as Big Oil, suggested that if governments wanted their economies to grow, they had better be prepared to burn more coal, oil and gas. However, figures cited by The Economist show the United States growing by 9% over the past seven years, even as demand for petroleum based products dropped by 11%.

Moreover, if we want to limit global temperature rise under 2°C that scientists have indicated as a tipping point for humanity, then an estimated 82% of the world's coal, 49% of its gas and 33% of oil will have to remain buried [1]. Using the 'proceeds' from the oil price drop to fund investment in renewables offers hope for more sustainable growth.

3. Cleantech needs to focus on commercialisation

The fall in the oil price is a challenge to renewables to justify themselves. Why, should I, as a consumer buy a hybrid car if the price of petrol at the pump is falling? Moral justifications are fine; but economic ones are almost always more powerful.

Renewable companies need to become more commercial, tighten their cost structures and wean themselves off government grants. As the price of one fossil fuel declines, the notion that we might have already reached peak oil now looks fanciful, and there will be less interest in expensive solutions. The decision by EON to split into two entities, spinning off its bulk generation and focusing in on renewable activities, distribution networks and efficiency services shows how big energy companies are having to react to squeezed margins in traditional markets. Dynamic mid-sized businesses should take note.

This is particularly challenging for off-shore wind and large biomass companies. Suzlon Energy, Asia’s second-biggest wind-turbine maker, recently sold its German unit for 75% of the original 2007 price - an indication of how challenging the market is. The outlook for solar by contrast is (excuse the pun) somewhat brighter. Not only has the price of solar panels been dropping (even as their efficiency rises) but they offer a decentralised means of getting power and so can compete at a local level.

4. Yes the oil price has gone down, but let's not burn more of the stuff

When a product becomes cheaper, economists tell us that the rational consumer will buy more, often ignoring the associated negative externalities - which in the case of oil (and other fossil fuels) are carbon emissions. The point here is that cheaper oil does not necessarily mean fewer emissions, indeed if we burn more of it, simply because it's cheaper, we could end up accelerating climate degradation.

The challenge for the cleantech industry is therefore adapting to a world in which consumers and businesses assume their energy costs will be falling. Given that gas prices are likely to fall over the next 12 months (although not nearly so dramatically as oil), not only will the pressure to retrofit homes and offices ease, but declining utility bills are likely to reduce the immediate demand for cheaper long-term energy options, further emphasising the need for renewables to offer cost-effective solutions.

5. And finally, let's not forget, 2014 was a stellar year

Forget the turmoil of the last few months for now; 2014 was an incredible year for the renewable energy sector. The latest figures from Bloomberg New Energy Finance suggest investment increased by 16% from the previous 12 months to US$310bn. While this is marginally below the all-time high of US$318bn set in 2011, it is more than five times the level achieved a decade ago, highlighting the rapid growth in the sector over recent years.

Renewable investment in China jumped by close to a third in 2014, overtaking Europe which largely stagnated, reflecting the respective health of the two economies. In North America, Canada (up 26%) saw strong expansion. While the United States (up 8%) and Japan (up 12%) carried on at a steady pace. But it was Brazil that reflected the largest change, with its investment in renewables almost doubling (up 88%)[2]. India newish government has targeted a doubling in solar installations to 2.3GW.

The social, economic and environmental fundamentals which underpin the growth of renewables are not going away. Levels of renewable investment this year may struggle to match 2014 levels, but the key will be using these resources - and the financial space afforded by the oil price drop - more effectively. If they are, then 2015 will be another great year for the sector.